Monetary Order: a Discussion of the Sovereign Money Concept?

As shown by Switzerland's recent referendum on the Sovereign Money Initiative, the issue of money creation by private commercial banks is being discussed not just by specialists, but by the general public too. What opportunities would be created by switching to a sovereign money system? And what would be the risks related to such a drastic step? According to Dirk Niepelt, Studienzentrum Gerzensee and University of Bern, it would be very cumbersome – and perhaps even impossible - to implement a sovereign money system. In such a system central banks would exercise greater responsibility and hold more power than at present, but would also be under far greater pressure. It would make central banks’ operations tougher and endanger a stability-oriented monetary policy. The positive impact of a sovereign monetary system could be achieved with more targeted, less drastic measures. The public could also be given access to electronic central bank money without linking this to the abolition of sight deposits at banks. Improvements on the status quo and a sovereign money system should involve an arrangement that would give the public a choice between traditional sight deposits and electronic central bank money. This would not require any new regulation. Ulrich Stolzenburg, Institut für Weltwirtschaft, Kiel, sees the advantages of a sovereign money system as higher financial stability and higher seignorage for governments. The drawbacks would include the need for additional regulations, the foreseeable increase in the cost of financial services, and the adjustment crisis in the banking sector that may be triggered by introducing such a system, which would burden the real economy. On the whole, however, the sovereign money system represents an exciting alternative to the current banking system, which promises greater macroeconomic stability in the long term, while the biggest risks are primarily in the shorter term. If the monetary system were to be reformed, Stolzenburg favours a gradual transition, rather than any sudden system reform. A slow transition that can be planned in advance would enable all those affected to gradually adjust to the new conditions. According to Alexander Rathke, Jan-Egbert Sturm and Klaus Abberger, ETH Zürich, the weaknesses in the current financial system can be eradicated more effectively via gradual reforms and adjusting existing instruments than by restructuring the present system with an uncertain outcome. A reform of risk weighting in the calculation of equity capital requirements, for example, is urgently needed. Compensating for this shortfall would make a far greater contribution to financial stability than, for example, a sovereign money initiative. Mathias Binswanger, Fachhochschule Nordwestschweiz, Olten, writes that today’s central banks have very little control over the money creation activities of commercial banks. The sovereign money initiative should therefore be used to win back central banks’ lost control over money creation by making it impossible for commercial banks to create money. This, however, would give central banks very little flexibility to react to false assessments. Hans Gersbach, ETH Zürich, notes that a sovereign money system would demand more information from central banks, for example, since the latter would have to act as the central planners of monetary creation. The elasticity of credit granted to the real economy by commercial banks when macroeconomic aggregates change is also greater in the current system than in the sovereign money system. The advantages of sovereign money architecture may include greater financial stability - especially as it would preclude bank-runs by private investors - and higher revenues for the state from money creation. In view of the sovereign money initiative and the wide range of potential monetary architectures, both politicians and academics need to analyse these different monetary systems more closely to see whether they may represent an alternative to the present system. Elisabeth Springler, Fachhochschule des BFI Wien, argues that the situation since the financial crisis would not have been improved by implementing a sovereign money concept if economic thinking had remained unchanged.